When Vendors Merge

By Renee Oricchio

Data storage giant EMC's recent announcement that it will purchase RSA Security for $2.1 billion is just the latest in a flurry of mergers and acquisitions in the IT sector. While Wall Street ponders what this trend means for shareholders, IT organizations are pondering what this means for them -- the customer. Will vital applications or services they use be phased out? Will vendors push them to new products that they don't want?  Will key personnel maintaining their contracts get shuffled around to other accounts or get laid off in the wake of the merger?

It's hard to imagine a CIO who hasn't been put in the position of asking these questions, given the number of major IT vendors involved in such mergers. RSA Security is just the latest target of EMC, which has gobbled up more than 20 other companies over the past couple of years. Oracle's $20 billion shopping spree began some 18 months ago with the acquisition of such major competitors as PeopleSoft and Seibel. Other mergers and acquisitions include Lenovo buying IBM's PC division, Symantec picking up Veritas, and Adobe acquiring Macromedia.

In the long term this may be good news for IT managers. According to a new Forrester Research Inc. survey, two-thirds of the IT executives who were interviewed responded favorably to streamlining the number of providers they work with.

However, in the short term, is the typical IT organization prepared for the upheaval that comes with such consolidations?

"No," says Gartner analyst, Andy Kyte, "CIOs score abysmally poor in managing vendor suppliers."

This may seem like a strong statement when you consider that the same Forester Research survey also shows 69% of those IT managers have a vendor management function within their group. But Kyte says you have to look at how they are managing their vendors and the amount of money and staff dedicated to governance.

When you look at staff costs versus supply costs, today's CIO, on average, is now allocating at least half of his or her budget to suppliers. Kyte estimates that figure will grow to 80% by the end of this decade, and yet IT organizations have not substantially reshaped their management structure to match the changes in their budgets. It's not uncommon for an enterprise to be critically dependent on a supplier, committing to spend millions of dollars and several years in a contractual agreement and at the same time not having one full-time employee managing that relationship. 

"It's the old command and control model, that form of management that migrated from the military into that first generation of managers in scientific fields in the 1960's and 1970's," says Kyte. That management model focuses on managing staff. Kyte goes on to say the new management model for the 21st century needs to be about managing outcomes, not people.

So how can IT organizations manage the best outcome when their suppliers merge with other suppliers? Industry watchers agree that CIOs must be vigilant and proactive.

• Build in protections up front  Forrester analyst Paul Roehrig emphasizes beefing up the "change of control clause" during the initial contract negotiations. Make sure to include provisions obligating suppliers not to move around key personnel managing services. Guarantee appropriate exit fees and termination rights. Lastly, insist on veto power when it comes to the actual location of service providers. If maintenance personnel or account managers need to be local, put it in writing.
• Develop a joint account plan  It's a common mistake. Usually, the supplier provides the account plan, which, of course, serves its objectives. However, vendor managers need one also -- complete with a set of goals, and a plan to monitor progress and appraise performances. They also need to spell out and assign responsibilities. The vendor manager and supplier need to coordinate account plans into a joint vision and use it as a touchstone through merger activity.
• Vendor managers should be senior managers  In a big dollar contract, it's an easy bet the supplier is assigning a very senior executive to manage the account. It's essential the vendor manager at the organization receiving services is senior, as well, in order to have a level playing field. It's equally important that the vendor manager have access to and influence with top levels of management within his or her own organization to ensure a nimble and appropriate response to the supplier's actions.
• Recruit vendor managers with experience working for suppliers  Since this is a relatively new breed of manager, it begs the question where to recruit talent. Gartner analyst Kyte suggests going for "the poacher turned game keeper." Who better to navigate the supplier's actions and see the signs of any upcoming changes than a former insider?
• Never get caught by surprise  No merger or acquisition of a supplier should ever come as a surprise. That may seem like a tough risk to minimize. But there are a couple of things an organization can do to safeguard itself. Monitor and understand the state of the supplier's enterprise. Be vigilant in noticing the latest trends and developments in its market. Even more important, cultivate relationships at the board room level where there is more likely to be enough intimacy to share such information.
• What not to do when things go wrong  The usual inclination is to get the account executive fired. Especially in the case of a merger or acquisition, this is usually the worst way to react. In all likelihood, what's not working is trickling down from the supplier's shake-up in upper management. Changing account executives will only get you an account executive who has no experience managing the contract while perpetuating the same problems. A better strategy is to hang onto the original account executive for consistency and using that relationship to convey feedback for changes.

While the biggest problems can best be avoided by simple vigilance and clear communication, Roehrig offers this one last piece of reassurance: "Most of the mergers and acquisitions activity doesn't mean they're going to buy a supplier and then annoy all the clients."

In that case, a worried CIO may want to remember the squeaky wheel gets the grease.

Renee Oricchio is a freelance writer in Norwalk, Conn. For the past 20 years, she has been writing and producing news segments about technology and business for CNN, MSNBC, Ziff-Davis, CNet and a variety of Silicon Valley-based local news outlets.